A Tale of Two Tax Plans

About the Author

William W. BeachDirector, Center for Data Analysis and Lazof Family FellowCenter for Data Analysis

With bombs falling in Iraq and the prospect of deficits exploding
back home, it's no surprise some lawmakers are getting cold feet at
the thought of passing a large tax cut like the one envisioned by
President Bush. We need something smaller and safer, they say.
Something like … well, like the one proposed by Senate
Minority Leader Thomas Daschle.

There's no question that those looking for a quick fix won't be
disappointed -- the Daschle plan would give the economy a modest
boost this year. But for those who want long-term and short-term
growth -- lots of new jobs and a high-performing economy, this year
and beyond -- it's no contest: The Bush plan wins, hands down. We
know because we've run the numbers.

The Daschle plan, which relies on one-year tax cuts targeted to
certain income groups and small businesses, plus large increases in
federal spending, will give gross domestic product (GDP) a bigger
boost in the first year. But after that, the Bush plan creates more
GDP growth and significantly outperforms the Daschle plan in every
other measure.

The Daschle plan would cause GDP to grow by $49 billion this year,
versus only $29.5 billion under the president's proposal. But even
in the first year, the president's proposal creates more jobs --
843,000 to 545,000 -- than the Daschle plan does. And the
differences only become more dramatic after that.

The Bush plan would create an average of 787,000 jobs every year
through 2013, according to our analysis. The Daschle plan provides
for modest job growth next year and little, if any, beyond that.
Same with economic growth. The Bush plan would give us an average
of $69 billion extra in GDP every year through 2013. With the
Daschle plan, we'd get about $15 billion next year and little, if
any, each year after that through 2013.

The Bush plan would take a serious whack at unemployment, cutting
the rate from 5.3 percent this year to 4.8 percent next year and
about 4.6 percent to 4.7 percent each year after that through 2008.
The Daschle plan would shave a half-percent off the unemployment
rate this year but leave it unchanged, at about 5.3 percent,
through 2013.

When it comes to encouraging business investment, Sen. Daschle's
plan would serve mainly to prove conservatives' point about tax
policy. When he provides a cut in taxes on business investment in
2003, investment in factories, equipment and other non-residential
products increases by $7.3 billion. The next year, when he takes
away the tax cut, the increase in business investment dries up with
it.

Meanwhile, President Bush's plan -- which calls for permanent cuts
that would be larger and directed to businesses of all sizes --
would produce $10.9 billion more in business investment this year
and a total of $581.6 billion more through 2013.

But Sen. Daschle's plan does not place a lot of stock in tax cuts
for economic stimulus anyway. It relies instead on the failed
formula of attempting to have government spend its way out of
economic doldrums. His plan calls for sending $71 billion in
federal funds to taxpayers in the form of advance refunds on tax
payments during the third quarter of this year and for sending
states $26 billion in subsidies, most in direct aid or support for
Medicaid payments, to address their budget shortfalls.

At best, this moves money around but does nothing to create growth.
At worst, it adds to the deficit problems of the states -- leading,
eventually to even higher taxes.

Conversely, President Bush pushes for growth that works -- and
lasts. He wants to speed up the tax cuts that don't take effect
until next year or, in some cases, 2006, so Americans can enjoy
their benefits now. He wants to put more Americans in the 10
percent tax bracket, provide marriage penalty relief now and
increase the child tax credit. He also wants to end the
double-taxation of dividends, to help Americans more fully share in
the benefits of the stock market.

Our estimates show that the Bush proposal would cut government
revenues by $31.4 billion this year and another $638.4 billion over
the next 10 years. And where does that money go? To those who
invest in America, create jobs and provide economic vitality for
all.

Which is why, in the end, it's truly no contest.

-William Beach is
the director of Center for Data Analysis at The Heritage
Foundation, a Washington-based public policy research
institute.

About the Author

William W. BeachDirector, Center for Data Analysis and Lazof Family FellowCenter for Data Analysis